About

Bitcoin[1] is a virtual crypto-currency regulated by a peer-to-peer network that creates a time-stamped register yielding chains of valid transactions. Unlike other digital currency systems or credit payments, Bitcoins are treated like cash and transactions cannot be reversed.

History

The need for a digital currency based in cryptography[2] was discussed in two separate academic papers published in 1993 by researchers at Carnegie Mellon University[6] and the University of Southern California.[7] Five years later, the idea was introduced to the the Cypherpunks[3] mailing list[4] by cryptography advocate Wei Dai, who suggested a system in which the currency would be both regulated and created through crowdsourced cryptography, thus eliminating the risk of double-spending altogether.

Proposition

On November 1st, 2008, a Japanese American physicist named Satoshi Nakamoto[8] distributed a paper[9] solidifying this idea into a nine-page proposal for something called “Bitcoin” via the Cryptography Mailing List.[10] The first blockchain was generated on or before January 3rd, 2009, as its Genesis Block[11], or first block, references the title of an article[12] published that day in the UK newspaper The Times about a physical bank bailout.

Early Development

According to Newsweek’s investigative report[95], Satoshi Nakamoto began working on the Bitcoin code in early 2009 with a group of other programmers, including Finnish programmer Martti Malmi and Australian developer Gavin Andresen, which culminated in the public announcement of the system and release of the first open-source wallet software via Cryptography Mailing List[13] on January 9th, 2009. The announcement envisioned that the total circulation would consist of 21 million coins, made available in increments with the full amount made available by 2140. The article also described Nakamoto as a genius physicist and mathematician who took cautious measures to protect his identity.

A photograph of Satoshi Nakamoto as printed in the Newsweek article

“He was the kind of person who, if you made an honest mistake, he might call you an idiot and never speak to you again,” Andresen says. “Back then, it was not clear that creating Bitcoin might be a legal thing to do. He went to great lengths to protect his anonymity.”

Exchange Market

On July 18th, 2010, the exchange market Mt. Gox[19] launched, allowing people to buy and sell Bitcoins as well as providing software for merchants to accept Bitcoins as payment on their online storefronts. The site also offers a live ticker of Bitcoin exchange rates (shown below). They claim to facilitate more than 80% of all Bitcoin trading as of March 2013.[20]

Mining

Bitcoins are generated through a process known as “mining,”[22][26] which adds transaction records to Bitcoin’s public register known as a block chain.[23] The chain exists as a record of Bitcoins spent in actual monetary value and to bar attempts from double-spending, or spending previously used coins. The process is meant be challenging, requiring a piece of data known as a proof of work[24] that has an ever-changing very low probability[25] for getting the hash for each transaction correct on the first try. The actual act of mining can be completed by dozens of different programs[27] for multiple operating systems, including Android. A ledger of the most recent blocks is provided by BlockExplorer.[25] A handful of miners have shared their mining hardware setups made from both desktops (shown below, left) and mobile phones (shown below, right) on YouTube.

Regulation

On March 18th, 2013, the United States Financial Crimes Enforcement Network issued a clarification[28] to the regulation regarding virtual currencies. Though the statement does not explicitly address Bitcoin, it stipulates that businesses that exchange American dollars for digital currencies qualify as Money Services Businesses (MSBs) and should thus be subject to federal regulations and must comply with money laundering laws.[29] However, users of the currency, or people who mine the currency for themselves, do not qualify as an MSB.

Inflation

In February 2013, Bitcoin’s value began increasing drastically and by mid-February, the price of Bitcoins had doubled from $13.50 per coin at the beginning of the year and risen above $27 per coin for the first time since 2011.[50] Despite a glitch that caused the price to drop 23% in mid-March[51], the Bitcoin value continued to rise throughout the month and reached $100 for the first time on April 1st.[52] Many analysts cautiously declared the trend a bubble, including Wall Street analyst Nick Colas who noted that the inflating value of Bitcoin was a “perfect storm”[53] attributed to a combination of a tech-savvy userbase, a large group of people unhappy with traditional banks and their policies, deposit taxes in European countries, constrained and predictable supply, and a clarification of U.S. regulations on its trade.

On April 3rd, Bitcoin’s trading value hit an all-time high of $147[54], leading to more concerns about the currency’s possible hyperdeflation[55], or a sudden, drastic collapse of its value. The same day, Bitcoin service Instawallet shut down indefinitely following a hack that revealed the vulnerabilities in their system’s architecture.[56] Despite this, the value continued to rise through the first week of April, reaching an all-time high of $194.90 on April 8th, 2013. The same week, a handful of other Bitcoin sites including Mt. Gox and Bitcoin-Central reported[57] security breaches and DDoS attacks.

Removal of Bitcoin Apps

On February 5th, 2014, Apple removed the Blockchain Bitcoin app from the iOS app store without explanation. Blockchain responded by claiming Apple had removed the app as an aggressive move against future competition:

“These actions by Apple once again demonstrate the anti-competitive and capricious nature of the App Store policies that are clearly focused on preserving Apple’s monopoly on payments rather than based on any consideration of the needs and desires of their users.”[88]

On February 6th, Bloomberg[91] reported that while applications monitoring Bitcoin prices remained in the store, but the Bitcoin transaction apps Coinbase and Gliph had been removed.

Reception

As of March 2013, Bitcoin users and miners congregate on Reddit[14] and the Bitcoin Talk Forums[15], among numerous other smaller groups. There is also a Wiki[21] and the online publication Bitcoin Magazine[18] that gathers information about the currency and keeps track of its exchange rates. Since 2011, Bitcoin conferences have been held annually[16] throughout Europe, with the first US conference scheduled for May 2013.[18]

Crash in April 2013

During the first few days of April, more than 75,000 new accounts were created on the Bitcoin exchange site Mt. Gox, or 125% more than the total number of signups in the previous month. On April 10th, 2013, Mt.Gox saw triple the average amount of daily trades, which their servers could not handle. The same day, Bitcoin prices dropped from $265 to $156 over the course of six hours, hitting a low of $105 at one point.[61] In early speculation, Ars Technica[58] noted that the price drop came several hours after Redditor bitcoinbillionaire[59] gave away nearly $12,000 USD to 13 seemingly random Redditors in a thread titled “I wish for the price to crash.”[60] on the Bitcoin subreddit. The Verge[61] reported that the crash was likely caused by DDoS attacks targeting Mt. Gox and other Bitcoin exchange sites earlier in the day, prompting investors to sell off their Bitcoins. During the time of the price drop, people were reporting a trade lag of 73 minutes on Mt. Gox.[66]

In the early morning of April 11th, Mt. Gox’s Twitter account confirmed[62] that the site was still under a DDoS attack and issued a press release[63] stating that the recent massive interest in Bitcoin trade had caused the site to lag. In response to the attacks and the server issues, they also announced that that they were going to shut down trading completely for 24 hours to let the market “cool down.” Within three hours, news of Mt. Gox’s temporary shutdown resulted in nearly 400 comments on a Reddit thread[64] and launched another discussion[65] on whether or not Mt. Gox should be phased out as the default Bitcoin exchange.

Crash in February 2014

On February 7th, 2014, the Bitcoin exchange Mt. Gox[88] announced they would be temporarily pausing all Bitcoin withdrawals to work on a transaction bug. The same day, the announcement was posted to the /r/bitcoin[92] subreddit, where commenters discussed the role programmer Mark Karpeles played in the transaction problems. On February 10th, Mt. Gox[90] posted a follow-up announcement claiming that a bug in the bitcoin software allowed users to duplicate transactions. On the same day, programmer Andreas Antonopoulos tweeted that the bugs were not unanticipated and added “Gox is full of shit.”

Also on February 10th, the Bitcoin Price Index CoinDesk removed Mt. Gox for failing to freezing Bitcoin withdrawals. Meanwhile, OptionsHawk Research founder Joe Kunkle tweeted a graph showing the price of Bitcoin rapidly falling. After remaining around $900 to $1000 for much of 2014, the price plunged to $535 before recovering to $636.

Controversies

Thefts

Since Bitcoin transactions cannot be reversed, if Bitcoins are stolen from a user’s digital wallet, they cannot be replaced. One of the earliest Bitcoin robberies occurred in June 2011, when a user known as Allinvain reported[30]25,000 Bitcoins (approximately $467,000 at the time) stolen from his account. It was later believed to have been caused by a Trojan virus[31] that would hack into unencrypted wallets and forcefully carry out the transfers. between 2012[32] and 2013,[33] there have been several reports of large sums of Bitcoins stolen from exchange sites, leading some enthusiasts to suggest offline storage of Bitcoin codes, either on encrypted hard drives that are not connected to the Internet or by physically writing them down. Bitcoin owner Charlie Shrem[41] has a ring with an engraving of his codes (shown below, left) to protect his investment and entreprenuer Mike Caldwell[35] has minted more than $2.5 billion in physical Bitcoins (shown below, right).

Trojan Virus

On April 4th, 2013, Dmitry Bestuzhev from computer security company Kaspersy Lab identified a virus[45] spreading through Skype which turned an infected computer into a Bitcoin miner. Bestuzhev pointed out that when the infiltration is repeated over time, the malware would be able to harness the power of thousands of computers to unlock Bitcoins at a rapid rate. The offending link was receiving an average of 2,000 clicks per hour at the height of its spread, with victims targeted in at least seven countries. At the time Bestuzhev’s article was published, the link had been clicked more than 11,000 times. The story was shared on Wired[46] the following day, with additional coverage from Slashgear[47], BBC[48] and Net Security[49] that week.

Ponzi Schemes

On July 23rd, 2013, the U.S. Securities and Exchange Commission (SEC) charged Texas resident Trendon T. Shavers[76] with operating a Ponzi scheme to raise at least 700,000 Bitcoins, or equivalent to $4.5 million at the time, from investor and misappropriating nearly 150,000 BTC for his personal use. According to the SEC, Shavers (a.k.a pirateat40) launched the First Pirate Savings & Trust (later renamed the Bitcoin Savings & Trust) through the Bitcoin Talk forums[70] in November 2011, enticing potential investors with up to a 7% interest rate on deposits of 2000 BTC or more.

On August 18th, 2012, Shavers closed down the service[71] after a handful of Bitcoin Talk users suspected it of being a fraudulent scheme.[72] When the closure was announced, Bitcoin prices dropped from $15 each to $10 (shown above). At the time of the closure, Shavers claimed to have 500,000 BTC, worth more than $5.6 million at the time.[73] He initially promised to refund everyone’s deposits plus interest, leading Bitcoin Forum users to create a thread[74] to monitor the progress of repayments. In the following weeks, after only one investor confirmed receiving any payment, members of Bitcoin Talk proceeded to dox Shavers[75] and track his location to Texas.

As the case is one of the first criminal prosecutions relating to Bitcoin, news of the charges appeared on a number of news and tech blogs as well as finance sites including The Daily Dot[77], Wired[78], Tech Dirt[79], The New York Times Deal Book[80] and CNN Money.[81]

Money Laundering

On January 27th, 2014, the U.S. federal authorities arrested Charlie Shrem (shown below), the CEO of Bitcoin exchange website BitInstant, at the JFK International Airport on charges of laundering more than $1 million worth of bitcoins for Silk Road customers and operating an unlicensed money-transmitting business. On the following day, the FBI arrested one of Shrem’s suspect partners Robert Faiella on the same charges. According to the criminal complaint and an investigation by the Internal Revenue Service, Shrem and Faiella exchanged $1.05 million in bitcoins over a 10-month period, during which they stayed in touch via e-mail correspondences to ensure that their transactions remain undetected from cash-processing companies.

On February 6th, the Miami Beach Police Department, in conjunction with the state attorney’s office and the U.S. Secret Service, arrested two men for allegedly running an illegal business that involves trading large volumes of currency for Bitcoin. According to the court documents and cybersecurity news blog Krebs On Security,[89] Florida residents Michell Espinoza and Pascal Reid were arrested on two counts of money laundering and one count of engaging in an unlicensed money servicing business after they showed up at a meeting which had been arranged via Bitcoin exchange site LocalBitcoins[93] by undercover state and federal agents under the pretext of discussing the use of Bitcoin to purchase stolen credit card numbers.

Mt. Gox Shutdown

On February 23rd, 2014, CEO Mark Karpeles of the bitcoin exchange Mt. Gox resigned from the board of the Bitcoin Foundation. The same day, the @MtGox Twitter feed deleted its entire tweet history. On February 24th, Mt. Gox suspended all trading. On the following day, Forbes[94] published an article reporting the the company’s shutdown was rumored to involve the theft of 744,000 bitcoins, which was valued to over $409 million at the time.

Usage

As of March 2013, a number of online businesses and non-profit organizations[43] accept Bitcoins, most notably Wordpress,[44]4chan,[44]Wikileaks,[38]Reddit[39] and OkCupid.[40] Additionally, the Internet Archive has offered their employees an option to receive a portion of their paychecks in Bitcoins.[41] There are also a handful of Bitcoin casinos[42] where players will bet anywhere from ฿66,000 to ฿1,787,470 per year, depending on the site.

In December 2014, Microsoft also started accepting Bitcoins for digital goods,[97] a move which came after their February update to Bing that allowed bitcoin price conversions through the search engine.

Silk Road

Bitcoins are the only currency accepted on Silk Road, an online black market that can only be accessed via The Onion Router (TOR). Though the site launched in February 2011, the site did not receive mainstream attention until Gawker[37] published an expose on it in June of that year. Silk Road allows people to buy a number of items including drugs, apparel, books, digital goods, drug paraphernalia, erotica and forgeries. In July 2012, it was estimated[36] that more than 1.2 million dollars US in sales were being generated monthly by the site.

Alternative Cryptocurrencies

Coinye

Coinye is an alternative cryptocurrency featuring the face of the American celebrity rapper Kanye West and launched by an anonymous group which aims to simplify the mining process through a front-end platform called “CoinyeMiner” and thus bring cryptocurrency to the masses. Coinye was scheduled to be released for public use on January 11th, 2014, however, the co-founders were forced to abandon the project during the days leading up to the launch, soon after receiving a cease-and-desist letter, followed by the subsequent filing of a trademark infringement suit.

Dogecoin

Dogecoin is an alternative cryptocurrency based on the popular Shiba Inu meme Doge and launched as a satire of the Bitcoin boom in late December 2013. Similar to Bitcoin and its derivatives, Dogecoin can be mined and exchanged for goods and services among the participants, though it is programmed to level out at a higher threshold of up to 100 billion coins and prevent any use of special bitcoin-mining equipment like ASICs.

RonPaulCoin

RonPaulCoin is an alternative cryptocurrency featuring the face of the retired libertarian congressman Ron Paul and based on Litecoin’s SCRYPT-based protocol. In comparison to other leading alternative cryptocurrencies, RonPaulCoin is decisively limited in its scope and circulation volume with a market threshold of up to 2.1 million coins, about one tenth of Bitcoin’s 21 million cap.

NyanCoin

NyanCoin is an alternative crypto currency which uses the cartoon Internet meme Nyan Cat as its mascot. On January 2nd, 2014, two different cryptocurrencies named “NyanCoin” were launched on the same day, though one of them quickly fell out of favor after it was accused of having been pre-mined, or the often-deceptive practice of allocating a certain portion of the currency’s total volume to the founders or early adopters prior to its public release. By January 6th, Nyan Cat creator Chris Torres had officially endorsed the non-premined version and the founders of the currency announced their partnership with Torres for the first “officially licensed cryptocurrency" in the BitCoin Talk Forums.[83] Powered by the Scrypt algorithm, the official licensed NyanCoin has a total of 337,000,000 coins with 337 coins per block and a difficulty retarget time of three hours.

On January 13th, the /r/NyanCoin[84] subreddit was launched for discussions regarding the altcoin. On January 23rd, The Register [85] published an article about the new cryptocurrency. On January 27th, The Daily Dot[85] published an article outlining the history of NyanCoin, which included statements from Torres and the NyanCoin creators.